Frack sand companies look more and more like compelling investments in today's oil and gas industry. Not only are they able to tap into the one big positive trend in the industry -- U.S. shale drilling -- but most of these stocks are still reeling from the oil price crash that started close to three years ago. One of the more compelling investments is Hi-Crush Partners (NYSE: HCLP) thanks to its lower cost operations and some interesting growth plans slated to come online in the coming months.
During the company's most recent conference call, Hi-Crush's management walked investors through some of these growth plans and the trends that underpin those plans. Here is a look at some of the most pertinent management statements from the company's most recent call with investors and analysts.
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Sand and sand logistics are becoming the keystone issues for shale development
For the past year, shale drilling in the U.S. has been growing at a rather astounding rate. Oil prices in the $50 a barrel range were more than enough to entice producers out of their capital preservation strategies and back into producing more oil from places like the Permian Basin. According to Hi-Crush CEO Robert Rasmus, this is putting enormous strain on companies that manufacture frack sand as well as the logistics network to deliver it to shale basins.
Of course, Rasmus used this situation to tout the fact that Hi-Crush's Northern White sand facilities all had Class-1 rail loading facilities that enabled it to meet customer demand.
Last mile logistics matter
Continuing on that sand logistics theme, Rasmus also went into the weeks on last mile logistics. This has been a big challenge for sand suppliers as delivery from rail terminals to well sites have been some of the less efficient aspects of the supply chain. So this gave Rasmus an opportunity to talk about its PropX and PropStream services. These are the last mile services that use interchangeable hoppers instead of dump trucks. So far, it looks like these kinds of services are paying off.
Hi-Crush isn't the only company seeing this kind of success with last mile services. U.S. Silica Holdings (NYSE: SLCA) mentioned on its conference call that its Sandbox logistics service is growing at a similar breakneck pace. If Hi-Crush and U.S. Silica can continue to find success with this last mile service and improve on-time deliveries, it could give them a differentiating factor over the rest of the frack sand industry.
Look at our new toy
With the Permian Basin quickly becoming the crown jewel of the American oil and gas industry again, frack sand producers are looking at all the ways possible to lower sand costs and get as much product delivered to the basin as possible. One way to do that is with a mine that is in the basin. Hi-Crush recently purchased land in Kermit, TX that has the potential to be a premier sand mine for the company. Here's Rasmus describing what it could do for the business.
It's looking like Hi-Crush made a shrewd move obtaining this land and turning it into a sand mine. It also helps if the company can blend that sand with Northern White sand because it will up the quality of the product.
Industry could be coming up short
If there is one thing worth critiquing about Hi-Crush's plans, it's that management is working on a short time horizon for all these expansion and development projects. One lesson that we learned from the oil price crash is that over-building for hypothetical growth could be devastating if that growth never materializes. Also, the company is putting off some debt reduction to do these expansion projects. According to CFO Laura Fulton, though, these moves need to happen now because the industry is already undersupplied.
It's entirely possible that this is the case, but a lot can change between now and 2018. We have already seen oil prices drop from the $50-$55 a barrel range to $45 a barrel or lower. If oil prices start trending down again, those ambitious growth plans could look like overestimations much like they did in 2014.
Turning these trends into profits
Despite all of this good news about high demand and short supply of sand, Hi-Crush has yet to post a profit. The company has said that the high costs of starting idle facilities back up and others not working at full capacity impacted margins. So when asked about these margin implications, Fulton broke down how those margins should improve in the coming quarters.
Again, these assumptions are based on where the oil and gas industry goes from here. The chance of another prolonged slump in oil prices seem far fetched considering how little investment is taking place outside the U.S. shale patch, but it is always a possibility shareholders should be ready for.
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